Taxes on Crypto: All You Need to Know
The decentralized nature of cryptocurrencies attracts millions of people around the world as digital currency solution seems to be far superior to fiat currencies. However, not everyone knows that cryptos are also taxed in the US and in many countries around the world. Read along to learn more about crypto tax policies and how much you need to pay for using digital money.
Crypto Taxes: How to Understand
Understanding cryptocurrency tax legislation is crucial as US citizens are legally obliged to pay their taxes because the government does not like the mainstream acceptance of crypto. However, not every crypto transaction and other manipulations are taxed. There are specific events related to cryptos, which result in tax liability, and every crypto user needs to know about them.
How Do They Work
In the United States, the IRS now considers virtual currencies to be digital assets as opposed to fiat money. They are treated similarly to stocks and bonds. Some activities that involve crypto are not taxed; the others are considered either capital gains or income. Every crypto investment is taxed at specific rates based on how long you have been using them, how you obtained them, etc.
It is known that cryptocurrencies offer a high level of security and anonymity to a certain extent. However, it is not 100% anonymous to use crypto in most cases. This is why more than 10 thousand users received electronic letters from the IRS back in 2019 with recommendations regarding crypto taxation. But despite being taxable, cryptos still provide numerous benefits.
What Is Under Taxes
The good thing is that not all crypto transactions and activities fall under taxes in the USA. Only certain financial operations using crypto are taxed, and here are the actions to keep in mind.
When exchanging cryptocurrencies for real money, it is required to pay taxes. Taxation is required when you sell tokens at a higher rate and receive profits from this operation. In case you sell crypto for less and experience losses, it is possible to deduct them from taxes.
Doing purchases with crypto is also taxed. When buying goods and services with BTC or other tokens, this is considered exchanging crypto for fiat money. When using tokens for real-life purchases, the coins are first exchanged for fiat currency and then used for buying goods.
There are multiple occasions when received crypto falls under taxes. Here are some of them:
· Receiving salary in crypto – some people already receive paychecks in cryptocurrencies. Getting paid in tokens is considered receiving income, which requires paying certain income tax.
· Receiving tokens for goods and services – if you sell any goods or services and receive payments in crypto, this is taxed by IRS as income as well.
· Mining – getting tokens through mining requires paying taxes based on the value of mined coins at the time they were received.
· Hard forks – all crypto received from hard forks appearing on the blockchain is also taxed. However, the type of taxes depends on the way this crypto is used after receiving it.
Most cases that involve receiving cryptocurrencies are considered taxable, although receiving tokens as a gift from someone does not involve taxes on your end. The money received this way will only become taxable after using it for other purposes.
Crypto exchanges and other platforms often give away free rewards to their users. This includes referral programs that provide crypto rewards for inviting friends via a unique link. Crypto airdrop events also allow getting tokens for free after completing a set of simple tasks, such as registering your email or posting some tweets.
You Won't Pay Taxes for
Luckily, not all operations with digital coins require taxes on crypto. Here are the actions that will not require paying additional taxes.
Buying Crypto by Cash
Simply purchasing crypto and storing it for however long you want does not involve taxes. It is possible to buy cryptocurrencies with fiat money and transfer them to a digital wallet for storage. This way, users can wait for beneficial prices and sell crypto for income, although the selling itself is taxed.
Donating crypto assets to official charitable organizations or non-profit institutions is usually not taxed. It is important to make sure that the institution you want to donate to qualify for a charitable deduction from taxes.
Transferring Between Wallets and Accounts
Simply transferring assets between your own wallets does not fall under taxes. In case you need to transfer assets to a more secure wallet of your own, you can do so at no expense or after paying a fee imposed by a crypto wallet.
The Level of Payment
As of 2022, there are specific tax rates for cryptocurrency users. When talking about crypto and taxes, it is important to know the rates for long-term gains.
Determining Owe of Crypto Taxes
First things first, it is necessary to determine whether any of your crypto activity is taxable. If you know that you have been receiving income with crypto or there were other taxable actions, you can start calculating. It is possible to deduct taxes by calculating all your gains, losses, and income related to cryptocurrencies. This is what you need to do:
· Determining your income in crypto – taxpayers from the USA should be familiar with the process of deducting taxes from income. All income received in tokens is also taxable. It is necessary to determine your tax bracket based on the amount of income you have gained.
· Determining gains and losses – in order to determine the amount of money you obtained or lost, it is important to know exactly how many assets you have started with. The cost basis is usually determined by the amount of money you have paid for the crypto. In case you mined these tokens, their value can be calculated based on their price on the market when you got them. After selling the assets, it is necessary to subtract their initial value from the amount of money you sold them for. This way, you will know whether you gained or lost money.
· Short-term or long-term gains – the rates of your taxes will also depend on the time you have held onto your crypto assets. Selling tokens after a long time, such as a year, results in paying a lower tax rate.
· Determining losses – you lose capital when you sell cryptocurrency assets for a lower price than you have bought them for. However, crypto capital losses can still be beneficial in case you need to offset some other gains with unused losses. This includes gains from stocks and other assets not related to crypto. With crypto losses, you can make your overall taxes lower.
Various crypto platforms provide support with tax software for calculating gains and losses on your crypto portfolio. For example, Coinbase offers to generate an automatic report on your capital gain or loss. Calculating crypto taxes might be confusing, especially for beginners. This is still relatively new territory in terms of taxation, which is why it is also highly recommended to receive professional assistance from an accountant.
Using cryptocurrencies often involves various taxes. These are not fees imposed by crypto exchanges for making transactions or converting tokens but legal taxes required by the US government. Taxes on cryptocurrency use might differ in every country. Some countries fully forbid using cryptos at all, while others do not have strict regulations. In the US, cryptocurrency is taxed in the same way as digital assets instead of currencies.
Luckily for crypto users, not all operations with tokens fall under taxes. Holding coins in a crypto wallet, receiving them as a gift, buying tokens with fiat money, or donating crypto to charity does not need to be stated in your tax return. However, such operations as selling crypto for real money, paying for services and goods, and receiving any type of income from it should be taxed. Tax rates are also determined based on payers in one household and the amount of time the crypto is stored in a wallet.
Frequently Asked Questions
How Much Is Tax on Cryptocurrency?
Tax rates for cryptocurrency use can differ based on the events tokens are used for. Taxable events include those registered as capital gains or income. The former are also divided into two categories, which are long-term and short-term gains. Long-term rates can range from 0% to 20% on average, and short-term ones vary from 10% to 37%.
Should I Pay Taxes for Every Crypto Transaction?
No, certain cryptocurrency transactions are not taxable. Taxes are not paid when crypto is simply bought from an exchange and stored in a wallet, donated to a charitable organization, transferred between digital wallets of one user, or sent and received as a gift.
Do Crypto Taxes Depend on Country?
Yes, every country has various policies regarding digital currencies. In some places, using crypto is prohibited by law. Other countries might allow crypto without having specific legislation regarding taxes.